What is the first step in the accounting cycle?

The first step in the accounting cycle is classifying and recording transactions. In this initial phase, all business transactions and events are identified and recorded in the accounting system. This involves capturing financial data from various transactions—such as sales, purchases, and expenses—and entering this data into the appropriate accounts in the general ledger.

Classifying and recording transactions lays the foundation for all subsequent steps in the accounting cycle. Once transactions are recorded, they can be organized into various categories, making it easier to prepare financial statements, analyze the data, and ultimately report the financial condition and performance of the business.

Without this initial step, the other components of the accounting cycle, such as preparing a trial balance or financial statements, cannot be accurately completed. Therefore, emphasizing the importance of accurately classifying and recording transactions ensures that the financial information is reliable and systematically structured for analysis and reporting.